The Staffing Industry is Evolving. Some Survival Tips.

Focus on high-margin business. Get more productive. Diversify services to dampen the down cycles.

That’s the pitch for much of the staffing industry for how to survive, and perhaps even thrive, in 2010 and beyond.

Staffing firms have suffered the same recessionary woes as their clients, only more so, given the hyper-cyclical nature of the business. Some firms weren’t fit to stay afloat and didn’t. The rest find themselves evolving in ways they might not have imagined a few years ago, when corporate America couldn’t hire enough contingent workers.

So let’s take a look at how the strong have carried on and will evolve. But first, here’s a snapshot of the staffing industry’s numbers, which range from truly scary to genuinely hopeful.

Downs and Ups Only Get SharperThe ranks of staffing firms have declined roughly 20 percent from about 10,600 in 2008 to approximately 8,500 in early 2010, wrote Jon Osborne, vice president of research at Staffing Industry Analysts (SIA.) As smaller staffing firms have faltered, larger firms have gobbled them up, according to James Pierce, vice president of strategic solutions at Peopleclick Authoria, which makes vendor management systems (VMS) software.

The demand for contingent workers appears to be supporting a recovery in the staffing industry. Temporary help services employment has risen from 1.87 million to 2.04 million in the 12 months ending March 2010, according to preliminary data from the Bureau of Labor Statistics.

More broadly, the hiring slowdown for permanent and contingent workers seems to have finally hit bottom. Employers in 12 of 13 industry sectors say they plan to modestly increase headcount in the second quarter of 2010, according to Manpower’s Employment Outlook Survey.

IT staffing, in particular, is headed upward. While engineering/design staffing activity dropped 18 percent and finance/engineering declined 10 percent in the year ending January 2010, IT increased 2 percent, according to an SIA survey. IT staffing is projected to grow 8 percent through 2010.

Slim Margins Force the Issue of Productivity
Despite all the growth, when client companies are pressed by their customers to lower costs, it’s inevitable that the pressure will be passed along to their vendors, including staffing firms.

“Clients want visibility into their spend so they can do effective rate and vendor rationalization,” says Pierce. Translation: Employers want to keep a closer eye on what they’re paying for contingent workers so they can drive a harder bargain. “They want to reduce spend, but they don’t want to tighten rates to the point that it impacts quality.” Some employers use a VMS to get better information on vendor utilization and contingent-worker pay rates.

“Our industry is fighting the margins every day,” says Dennis Judge, executive vice president at staffing and consulting firm The Judge Group. “The larger national accounts are trying to push the rates down. We’ve had business we had to walk away from because we couldn’t provide labor at the cost on their RFP.”

The experience of individual firms has been gut-wrenching. “Our business did a very sharp V through 2009,” says Rob Lowry, executive vice president at Apex Systems, which provides staffing in IT, finance and accounting, engineering and legal. After a severe downturn in early 2009, “our rapid growth in the second half has continued through the first quarter of 2010.”

How did Apex weather the storm? “We stayed close to our customers and shifted resources toward current opportunities,” says Lowry. “Although I’m operating now with about 25 percent fewer recruiters, we still had folks in place when the recovery started. We’ve increased our productivity by 50 percent by getting recruiters focused on expertise in certain technologies. We’re breaking down the recruiting process more, looking at it as a supply chain that can produce results better, faster, cheaper.”

Diversifying Services May Ease Cyclicality
Even as successful staffing firms are harvesting the gains of better productivity and a focus on high-margin business, they’re wise to start thinking about the next business downturn, however many years off it might be. One strategy is to reduce the extreme cyclicality of the business by diversifying into related offerings such as vendor management systems and managed services.

Staffing clients can be sold on VMS if they understand the advantages of automating recruitment processes, cutting costs and demanding top value from their staffing vendors. “VMS and MSPs are the future,” says Lowry.

Superior Group has enacted this strategy. “We’re well diversified in our client base, but also in our range of services, including recruitment process outsourcing, payroll processing and other HR services,” says Christopher Delaney, director of client recruiting services at Superior. “We make automatic and paperless some processes that employers may have been overpaying for.”

Of course, nearly all lines of business lost ground in the great recession. “Managed services lost steam over the recession, but now a lot of companies are considering this approach or reviewing the value of their current managed services program,” says Delaney.

A Tempered Optimism

Although the economy seems to have bounced off the bottom, employers are still leery about bringing on more workers. “Some clients are waiting to see how much SUI [state unemployment insurance] costs go up” before firming up their staffing plans for the rest of this year, says Delaney.

Still, staffing industry executives have to be cheered by a resurgence in demand for top talent. “We’re again seeing candidates with multiple offers, which is a very good sign,” says Lowry. “But it’s challenging because we don’t expect our clients to ease up on rate pressure.”

Some staffing firms even see in 2010 opportunities in additional markets. “We’re going to consider new locations in other cities for later this year,” says Judge.